Results of the QIS5 Report

Transcription

1 aktuariat-witzel Universität Basel Frühjahrssemester 2011 Dr. Ruprecht Witzel

2 On 5 July 2010 the European Commission published the QIS5 Technical Specifications The calculations were done in the second half of the year 2010 The reporting date to be used by all participants should be end December 2009 On 14 March 2011 the European Insurance and Occupational Pensions Authority (EIOPA) published the Report on the fifth Quantitative Impact Study (QIS5) for Solvency II This presentation summarizes the main results of this report Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 2

3 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 3

4 1. Introduction 1.3. Objectives The results of QIS5 are intended to be of use in the European Commission s development of level 2 implementing measures. To try to ensure that the results provided a representative view, the target participation rates were significantly increased from previous QIS exercises. There was a particular emphasis on increasing participation among small and medium-sized (re)insurance undertakings. QIS5 aimed to obtain detailed information on the quantitative impact of the proposals on insurers and reinsurers solvency balance sheets and also to check that the proposals were aligned with the principles and calibration targets set out in the Solvency II Framework Directive. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 4

5 1. Introduction 1.3. Objectives It was also the intention to encourage undertakings and supervisors to prepare for the introduction of Solvency II and identify areas where further preparatory work may be required, and to provide a starting point for ongoing dialogue between supervisors and the industry as we move towards Solvency II implementation. Finally, it would also allow EIOPA to assess the feasibility and complexity of the proposals. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 5

6 1. Introduction 1.4. Participation 77% of the 4753 European (re)insurers supervised by EIOPA members and observers at end 2009 will be affected by the Solvency II directive. A thousand existing small undertakings are expected not to fall into the scope of the directive. 68% of the affected (re)insurers participated on a voluntary basis in the fifth quantitative impact study. 167 groups, including major groups active on a worldwide basis as well as groups with business concentrated in a few or even a single EEA market, provided input allowing policy-makers to better understand the impact of the Solvency II proposals on a consolidated basis. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 6

7 1. Introduction 1.4. Participation This report focuses on the quantitative and qualitative responses of the 2520 (re)insurers and 167 groups which provided usable information. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 7

8 1. Introduction 1.4. Participation Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 8

9 1. Introduction 1.4. Participation Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 9

10 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 10

11 2. Overall Financial Impact 2.1. Overall Surplus Since the previous QIS, which was run on end 2007 accounts, the insurance sector financial surplus under the current solvency regime has seen a marked decrease in 2008 (of the order of 200bn) - followed by a partial recovery in This evolution is largely explained by the impact the financial crisis had on the value of assets owned by the sector, and on interest rates used to discount liabilities in some countries. At the end of 2009 the surplus was approximately 500bn. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 11

12 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 12

13 2. Overall Financial Impact 2.1. Overall Surplus The Solvency II framework replaces the existing solvency requirement with a set of two financial requirements: a threshold triggering immediate and ultimate supervisory action named the Minimum Capital Requirement (MCR) and a higher, risk-sensitive capital requirement named the Solvency Capital Requirement (SCR). Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 13

14 2. Overall Financial Impact 2.1. Overall Surplus The Solvency Capital Requirement (SCR) is defined as the potential amount of own funds that would be consumed by unexpected large events whose probability of occurrence within a one year time frame is 0.5%. This definition based on a probability measure allows (and sometimes mandates) the replacement of all or part of the standard formula with an internal model, when this can be shown to be better able to fulfill the directive requirements in relation to an undertaking s particular risk profile. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 14

15 2. Overall Financial Impact 2.1. Overall Surplus The Minimum Capital Requirement (MCR) is defined as the potential amount of own funds that would be consumed by unexpected events whose probability of occurrence within a one year time frame is 15%. In order to ensure the smooth functioning of graduated supervisory intervention (often referred to as the ladder of intervention ), the linear result produced by the MCR calculation is bounded between 25% and 45% of the SCR, subject to an absolute minimum. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 15

16 2. Overall Financial Impact 2.1. Overall Surplus The following graph shows the overall quantitative effect of the switch from the current requirements to the two Solvency II capital thresholds as specified under QIS5. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 16

17 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 17

18 2. Overall Financial Impact 2.1. Overall Surplus The financial position of the European insurance sector remains comfortable assessed against the standard formula SCR calculated according to the QIS5 specifications, with the eligible amount of own funds to cover the SCR/MCR exceeding the regulatory requirements by around 360bn. This surplus has decreased by c. 120bn compared to the current regime. At the same time, the margin before the MCR, the point of mandatory supervisory intervention, has increased by 200bn. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 18

19 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 19

20 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 20

21 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 21

22 2. Overall Financial Impact 2.1. Overall Surplus Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 22

23 2. Overall Financial Impact 2.3. The main drivers of the surplus changes Three main drivers explain the changes in the surplus from the current regime to the Solvency II framework: the shift from the current balance sheet to the harmonized Solvency II balance sheet; the shift from the current requirements to the harmonized Solvency II capital requirements; and the differences in the own funds elements allowed to cover the requirements. The following graph shows the respective influence of these items, splitting the valuation impacts into positive and negative effects. As this revaluation changes the amount of own funds compared to the current situation, it also creates deferred tax assets or liabilities. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 23

24 2. Overall Financial Impact 2.3. The main drivers of the surplus changes Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 24

25 2. Overall Financial Impact 2.4. Impact of diversification To calculate the Solvency II capital requirement, which is defined at the overall SCR level, the standard formula applies a modular bottom-up approach in which each of the underlying risk drivers is modeled using the same calibration as that set by the directive for the overall result. For QIS5, the sum of the individual risks modeled totaled more than 1300bn. To acknowledge the fact that the individual risks are not all expected to materialize at the same time (e.g. a shock on financial markets and a loss on underwriting risks would not necessarily crystallize at the same time), the standard formula recognizes the benefits of risk diversification through the use of linear correlation techniques. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 25

26 2. Overall Financial Impact 2.4. Impact of diversification For QIS5, these diversification benefits amounted to a 466bn reduction in the total risk charge at solo level. The last stage in the derivation of the SCR recognizes that if risks were to materialize, part of their cost might be transferred onto policyholders (e.g. through a reduction in the bonuses attributed to policies with profit participation), and part of the remaining cost might result in a reduction in the future taxes expected to be paid to tax authorities. For QIS5, the expected sharing of the cost of risk crystallization with policyholders and tax authorities resulted in a 314bn reduction in the own funds needed. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 26

27 2. Overall Financial Impact 2.4. Impact of diversification Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 27

28 2. Overall Financial Impact 2.4. Impact of diversification Overall, the final SCR of 547bn is a little above 41% of the sum of individual risks modeled. Using this overall risk reduction as a basis for calculating the reduction in individual risks gives a rough idea of the average real risk charges. Using this simple approach would for example show that while the initial risk loading for listed equity in QIS5 was 30% of the equity exposure, the final risk capital required was on average equivalent to a 12.4% capital charge. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 28

29 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 29

30 3. Valuation of Assets and other Liabilities 3. Valuation of Assets and other Liabilities Outlined below is the composition of the balance sheet, for both solo undertakings and groups, and under the valuation principles of QIS5 and the current accounting regime. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 30

31 3. Valuation of Assets and other Liabilities The current balance sheet (solo) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 31

32 3. Valuation of Assets and other Liabilities The current balance sheet (solo) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 32

33 3. Valuation of Assets and other Liabilities The QIS5 balance sheet (solo) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 33

34 3. Valuation of Assets and other Liabilities The QIS5 balance sheet (solo) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 34

35 3. Valuation of Assets and other Liabilities 3.1. General In general the QIS5 economic valuation requirements for assets and other liabilities were supported and did not cause many problems. Because of the similarity with EU endorsed international accounting standards (IFRS) many undertakings have experience with most of the valuation requirements. This is especially the case for undertakings that use IFRS or undertakings that use local GAAP in countries where the local accounting principles are similar to IFRS valuation principles. Countries where local accounting principles differ significantly from IFRS and where assets are valued on a cost basis reported more problems and some doubts about the reliability of the reported QIS5 balance sheet. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 35

36 3. Valuation of Assets and other Liabilities 3.5. Intangible Assets Most intangibles were valued at nil in the QIS5 balance sheet. Some undertakings valued software as an intangible asset, often justifying this with reference to the valuation in IAS 38 or local accounting standards. A couple of undertakings recognised intangibles in respect of renewal rights and customer relationships, consistent with their audited financial statements. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 36

37 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 37

38 4. Technical Provisions 4. Technical Provisions Under Solvency II, the valuation of technical provisions follows the transfer value principle, under which the value of technical provisions shall correspond to the current amount the insurer would have to pay if was to transfer its insurance obligations immediately to another insurer. To achieve a valuation consistent with this principle, the technical provisions are calculated as a best estimate plus a risk margin. The best estimate corresponds to the probabilityweighted average of future cash-flows, taking account of the time value of money. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 38

39 4. Technical Provisions 4. Technical Provisions The risk margin represents the cost of providing an amount of eligible own funds equal to the Solvency Capital Requirement necessary to support the insurance and reinsurance obligations over the lifetime thereof. Net technical provisions refers to technical provisions net of reinsurance recoverables. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 39

40 4. Technical Provisions 4.1. Comparison with current regime Overall gross technical provisions for all lines of business decreased by 1.4% from Solvency I to QIS5. The main differences between technical provisions under the QIS5 and Solvency I methodologies can be explained by the following: the use of a new discounting model including the use of an illiquidity premium; the absence of any surrender floor; the recognition of future premiums and charges; and the use of realistic assumptions in the best estimate calculation (i.e. no implicit prudence margin, although this is partly offset by the inclusion of an explicit risk margin in addition to the best estimate). Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 40

41 4. Technical Provisions 4.1. Comparison with current regime In the valuation of QIS5 liabilities, management actions and policyholders behavior, such as lapses, renewals and surrenders, were taken into account. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 41

42 4. Technical Provisions 4.1. Comparison with current regime For life insurance business net technical provisions in QIS5 increased in comparison with Solvency I. This was mainly caused by the decrease in reinsurance recoverables, as gross technical provisions in fact showed a slight decrease of 1.0%. The graph below shows a comparison of life net provisions for all QIS5 participants under QIS5 and Solvency I. We note that total net provisions are greater under QIS5 than under Solvency I and that this is an increase of around 3% (for solo undertakings). Net provisions for with profit business increased by 8% under the new regime. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 42

43 4. Technical Provisions 4.1. Comparison with current regime Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 43

44 4. Technical Provisions 4.1. Comparison with current regime For most non-life lines of business net provisions have decreased from Solvency I to QIS5; gross provisions for non-life decreased by 24.9%. Please note that equalization reserves can no longer be included in the technical provisions. The decrease between Solvency I and QIS5 for non-life business is mainly due to the discounting of future cash flows, and the exclusion of the implicit safety margin included in technical provisions through prudent and cautious assumptions, partially offset by the inclusion of an explicit risk margin. The observed changes could also be partially due to different segmentations between the two regimes. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 44

45 4. Technical Provisions 4.1. Comparison with current regime Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 45

46 4. Technical Provisions 4.2. Discount rate and illiquidity premium General Comment Based on the amount of the illiquidity premium risk submodule in the SCR, which corresponds to a reduction of 65% of the illiquidity premium included in the valuation of technical provisions, the effect of the introduction of the illiquidity premium in the valuation of technical provisions in QIS5 can be estimated as being almost 1% of the value of technical provisions (which represents around 15% of SCR). Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 46

47 4. Technical Provisions 4.2. Discount rate and illiquidity premium 50% Bucket The most common products where 50% of the illiquidity premium was used were nonlife in general, unit- and index-linked business, life without profit participation, SLT (Similar to Life Techniques) health, non-slt health and reinsurance (both life and non-life). Some undertakings also used 50% of the illiquidity premium for life insurance with profit participation, pure savings products and longevity swaps. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 47

48 4. Technical Provisions 4.2. Discount rate and illiquidity premium 75% Bucket The most common products where 75% of the illiquidity premium was used were life insurance with profit participation in general, pure savings products, unitand index-linked insurance with guarantees, and various types of annuities. Some undertakings also used the 75% bucket for SLT health, non-life, non-slt health, life reinsurance, annuities from non-life, and life insurance without profit participation. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 48

49 4. Technical Provisions 4.2. Discount rate and illiquidity premium 100% Bucket The most common products where 100% of the illiquidity premium was used were different types of annuities (including annuities from non-life). 100% of the illiquidity premium was also used for retirement business in run-off, unit-linked insurance, nonlife insurance, and non-slt health insurance. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 49

50 4. Technical Provisions 4.2. Discount rate and illiquidity premium Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 50

51 4. Technical Provisions 4.3. Risk margin Very few undertakings across Europe reported having used the full calculation approach for the valuation of the risk margin. Almost all supervisors noted that a full calculation was often too complex and time-consuming for undertakings. Undertakings have therefore largely used the proposed simplifications. Because the calculation was so burdensome, supervisory authorities often supported the use of simplifications, some of them also pointing out that the relative immateriality of the risk margin means that it does not justify such difficult calculations. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 51

52 4. Technical Provisions 4.3. Risk margin As shown in the graph, for EEA solo undertakings the risk margin is higher as a proportion of net best estimate for business without profit participation compared to other lines of business. For some non-life lines of business the ratio is a bit higher than 10%. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 52

53 4. Technical Provisions 4.3. Risk margin Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 53

54 4. Technical Provisions 4.3. Risk margin Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 54

55 4. Technical Provisions 4.3. Risk Margin The following two graphs (above) show the percentage of total provisions which could not be reliably replicated by assets with an observable market value, and which were calculated as a best estimate plus risk margin. They show that the percentage of technical provisions calculated as a whole (those which could be reliably replicated by assets with an observable market value) in QIS5 is almost nil in non-life, while it is material in life, especially in reinsurance. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 55

56 4. Technical Provisions 4.3. Risk margin Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 56

57 4. Technical Provisions 4.3. Risk margin Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 57

58 4. Technical Provisions 4.4. Segmentation Life Almost all countries reported difficulties with the second level of segmentation (death, survival, disability/morbidity, saving). The main issue is the idea that a contract is classified according to the main risk driver at inception of the policy and does not need to be reclassified over the life of the policy. Undertakings were of the view that this approach materially distorts the picture, as the nature of a policy changes over time. Some life undertakings indicated their support for segmentation according to the relevant risk at reporting date. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 58

59 4. Technical Provisions 4.4. Segmentation Life Moreover undertakings in several countries reported that it was unclear when to unbundle a contract. A few countries reported problems with the segmentation of some hybrid contracts (e.g. unit-linked products combined with guarantees). Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 59

60 4. Technical Provisions 4.4. Segmentation Non-Life Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 60

61 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 61

62 5. SCR Standard Formula 5.1. The overall SCR The Solvency Capital Requirement (SCR) is the riskbased capital requirement for undertakings under Solvency II. It is calibrated to a 99.5% Value at Risk confidence level over one year. In structure the SCR is composed of a number of modules which in turn are composed of sub-modules. The capital requirements arising from these submodules and modules are aggregated using a correlation matrix. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 62

63 5. SCR Standard Formula 5.1. The overall SCR (all; SCR = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 63

64 5. SCR Standard Formula 5.1. The overall SCR (all; BSCR = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 64

65 5. SCR Standard Formula 5.1. The overall SCR (all; SCR in % of BSCR) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 65

66 5. SCR Standard Formula 5.1. The overall SCR (Life; BSCR = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 66

67 5. SCR Standard Formula 5.1. The overall SCR (Non-Life; BSCR = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 67

68 5. SCR Standard Formula 5.5. Market risk (all; Market Risk = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 68

69 5. SCR Standard Formula 5.7. Life Underwriting risk (all; Life Risk = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 69

70 5. SCR Standard Formula 5.7. Life Underwriting risk (Life; Life Risk = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 70

71 5. SCR Standard Formula 5.9. Non-life Underwriting risk (Non-L; Non-Life Risk = 100%) Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 71

72 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 72

73 6. SCR Internal Models 6.2. Current status of internal modeling in the EEA Participants reported the following main reasons for using internal models instead of the standard formula: internal models better reflect the undertakings specific risk profiles, additional risks are covered by the internal model beyond those covered by the standard formula; the internal model applies a more granular aggregation method than the standard formula; the standard formula does not take into account volatility; and to use IFRS valuation rules instead of QIS5. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 73

74 6. SCR Internal Models 6.2. Current status of internal modelling in the EEA In relation to the last comment, we note that internal models may be used to calculate the SCR but should not change the approach to valuation. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 74

75 6. SCR Internal Models 6.3. General comparison of the internal model results with the standard formula The overall SCR results are regarded in this report as the most comparable figure for analysis because it should include all risk factors and adjustments. In QIS5 234 undertakings (about 10% of all participating undertakings) provided overall SCR results calculated by internal models. It should be emphasized that this meant EIOPA could not prepare detailed analysis of internal model results across the EEA. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 75

76 6. SCR Internal Models 6.3. General comparison of the internal model results with the standard formula Comparison of the internal model SCR and the standard formula SCR (based on the small sample) demonstrates the impact which internal models have on the final capital requirement. The table shows that the median of the SCR ratio across all undertakings was 91% and the weighted average was 99%. On average in the figures provided by undertakings the internal model results were very close to those derived by the standard formula; however, there was variation at individual level. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 76

77 6.3. General comparison of the internal model results with the standard formula. 6. SCR Internal Models Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 77

78 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 78

79 7. MCR 7.1. MCR calculation In general no major practical difficulties in calculating the MCR were mentioned by undertakings. There were a number of comments about the lack of risk sensitivity in the MCR, with a small minority of countries proposing it be set to a fixed proportion of the SCR. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 79

80 7. MCR 7.2. MCR corridor The MCR was subject to a corridor of between 25% and 45% of SCR, in order to ensure an adequate ladder of supervisory intervention in all cases. At EEA level 35% of undertakings MCRs are already within the corridor and are thus unaffected by it. The MCRs of 41% of undertakings are subject to the lower limit while 23% of undertakings MCRs are caught by the upper limit, giving the combined distribution below. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 80

81 7. MCR 7.2. MCR corridor Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 81

82 7. MCR 7.3. AMCR As well as the adjustment for the corridor, there was also a requirement that the MCR be greater than the AMCR (Absolute Minimum Capital Requirement) levels set for nonlife, life and composite undertakings respectively. Examples: 2.2m for Non-Life insurance companies 3.2m for Life insurance companies 3.2m for reinsurance companies For almost 15% of participants across Europe, this resulted in a final MCR above the 45% cap, and for 6.6% of undertakings, this final MCR was higher than their SCR. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 82

83 7. MCR 7.3. AMCR Some countries were concerned by this last group, and questioned how the ladder of supervisory intervention would apply if there was only the hard limit of the MCR, without the additional limit of the SCR above it. Some supervisors commented that a number of the undertakings which failed to meet their MCR were undertakings which would have been able to meet their calculated MCR, were it not for the AMCR coming into play and raising this higher. Also on the AMCR, a few countries proposed that clarification on indexation and exchange rates for non-euro AMCR will be needed going forwards. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 83

84 Content 1. Introduction 2. Overall Financial Impact 3. Valuation of Assets and other Liabilities 4. Technical Provisions 5. SCR Standard Formula 6. SCR Internal Model 7. MCR 8. Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 84

85 8. Own Funds 8.1. Composition of Own Funds Under Solvency II there are two types of own funds: basic own funds on the balance sheet and ancillary own funds which are items which can be called up to absorb losses. Basic own funds comprise the excess of assets over liabilities which is broadly represented by ordinary share capital, the equivalent for mutual and mutual type undertakings and reserves together with subordinated liabilities. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 85

86 8. Own Funds 8.1. Composition of Own Funds The tiering system categorizes the own funds items according to their loss absorbing characteristics. Various adjustments are made to take into account restrictions on the availability of own funds items, in order to arrive at the amount available to meet the Solvency II capital requirements. A system of limits establishes the amount of own funds eligible to meet the SCR and MCR respectively. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 86

87 8. Own Funds 8.1. Composition of Own Funds Available own funds amount to 921bn in total. Of this 846bn represents the highest quality Tier 1, which does not have any restrictions on its use to meet the SCR/MCR. A breakdown of the available own funds is below. From this it can be seen that the majority is basic own funds with ancillary own funds representing only 1.3%. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 87

88 8. Own Funds 8.1. Composition of Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 88

89 8. Own Funds 8.2. Unrestricted Tier 1 This represents the highest quality own funds and accounts for 91.9% of available own funds (for groups 81.5%). QIS5 analyses the components of unrestricted Tier 1 by extracting the accounting balance sheet values for ordinary share capital, mutuals initial fund, share premium, retained earnings and other reserves appearing in the accounts. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 89

90 8. Own Funds 8.2. Unrestricted Tier 1 Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 90

91 8. Own Funds 8.5. Adjustments to Basic Own Funds These can arise in relation to ring-fenced funds, restricted reserves, participations in financial and credit institutions and net deferred tax assets. The nature and quantum of the various adjustments are set out in the chart below. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 91

92 8. Own Funds 8.5. Adjustments to Basic Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 92

93 8. Own Funds 8.6. Ancillary Own Funds Ancillary own funds (AOF) as off-balance-sheet capital represent one of the key developments of Solvency II. Under the Solvency I regime certain items form part of the available solvency margin but will be treated as AOF under Solvency II. These are generally specific to certain market sectors a good example is the calls which mutuals may make on their members. A more general framework for off-balance sheet items extends the potential for undertakings to use such items although it is not clear to what extent they will seek to make use of AOF once Solvency II is implemented. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 93

94 8. Own Funds 8.6. Ancillary Own Funds The nature of AOF means that there must be the safeguard of supervisory approval, as specified in the Framework Directive, before such items can be counted towards the SCR. AOF are classified as ancillary tier 2 if on being called up and paid in they become tier 1 or otherwise as ancillary tier 3. Ancillary tier 2 amounted to 11.6bn spread over thirteen countries of which 10.5bn was accounted for by three countries. Ancillary tier 3 was much less significant, with 0.1bn reported over four countries. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 94

95 8. Own Funds 8.6. Ancillary Own Funds The graph below provides a breakdown of these amounts by type of ancillary own funds. A significant amount of the ancillary tier 2 represents letters of credit and guarantees held in trust by an independent trustee, as envisaged under article 96 (2) of the Framework Directive, together with supplementary calls by mutual and mutual type organizations, also referred to in article 96. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 95

96 8. Own Funds 8.6. Ancillary Own Funds Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 96

97 8. Own Funds 8.7. EPIFP QIS5 required the identification and calculation of an amount representing expected profits included in future premiums (EPIFP) and its disclosure as a separate item under unrestricted Tier 1. For this purpose future premiums are those taken into account as part of the cash inflows used to determine technical provisions under Solvency II. The identification of an EPIFP amount as a component of the excess of assets over liabilities within Tier 1 is intended to inform the continuing policy debate and Level 2 negotiations. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 97

98 8. Own Funds 8.7. EPIFP Of 2520 undertakings participating in QIS5 745 (29%) identified EPIFP. Across the different countries there was significant variation in levels of completion, ranging from nil to 80% with an average across Member States of 34%. Five countries accounted for 70% of the EPIFP total amount of 83.7bn. Putting these amounts in context the weighted average percentage of EPIFP to Tier 1 among undertakings was 20% with a median of 14%. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 98

99 8. Own Funds 8.7. EPIFP However it should be noted that the Tier 1 attributable to the undertakings which did identify EPIFP represents 45% of Tier 1 for QIS5 as a whole indicating that this group is drawn from larger undertakings. Not surprisingly EPIFP is a more important component of own funds for life and health insurers as compared to non-life insurers. As emphasized above though, results should be treated carefully, as they differ greatly between undertakings and countries. Furthermore, from the qualitative responses it appears that many non-life undertakings did not engage with this part of QIS5 or assumed it was relatively insignificant. Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS 11 99

100 8. Own Funds 8.7. EPIFP Akt. Contr II Solvenz 8. Results QIS5 Dr. Ruprecht Witzel; FS